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Only Paul Could Go To Changchun

Liquidity Requirements and the Interbank Loan Market: An Experimental Investigation

8/12/2018

 
Here.

We develop a stylized interbank market environment and use it to evaluate
with experimental methods the effects of liquidity requirements. Baseline and
liquidity-regulated regimes are analyzed in a simple shock environment, which
features a single idiosyncratic shock, and in a compound shock environment, in
which the idiosyncratic shock is followed by a randomly occurring second-stage
shock. Interbank trading of the illiquid asset follows each shock. In the simple
shock environment, we find that liquidity regulations reduce the incidence of
bankruptcies, but at a large loss of investment efficiency. In the compound
shock environment, liquidity regulations not only impose a loss of investment
efficiency but also fail to reduce bankruptcies.

From:

Douglas Davis
Oleg Korenok
John Lightle,
Edward Simpson Prescott

Federal Reserve Bank of Cleveland

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